HQ 0544764 - Appraisement of Merchandise Assembled in Mexico Pursuant to a Shelter Operation Contract - United States International Trade Commision Rulings

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HQ 544764
January 6, 1994

VAL CO:R:C:V 544764 ILK

CATEGORY: VALUATION

RE: Appraisement of Merchandise Assembled in Mexico Pursuant to a Shelter Operation Contract

This is in response to your letter of July 24, 1991 and your July 31, 1992 supplemental submission (hereinafter referred to as the "request"). On behalf of your client ------- ---- Company (hereinafter referred to as the "importer"), a United States company, you request a ruling on several issues relating to the appraisement of lock assemblies imported from Mexico, pursuant to a shelter operation contract. This response follows a June 30, 1993 meeting between yourself and members of my staff from the Value and Marking Branch, and an August 12, 1993 submission made on behalf of the importer. We regret the delay in responding.

FACTS:

The importer of record is a manufacturer and distributor of lock assemblies. Participating in what is commonly referred to as a "shelter operation", the importer has contracted for the assembly of locks with ---------- -------, Inc. (hereinafter referred to as the "shelter"), a U.S. company. The shelter is the U.S. parent of a Mexican assembler, ------S.A. de C.V. (hereinafter referred to as the "assembler"). The importer supplies the assembler with components, and pays the shelter for the cost of services rendered in Mexico. The importer is represented as being unrelated to the assembler and to the shelter. A copy of the contract between the importer and the shelter has been provided to us. The contract refers to the importer as the "purchaser" and the shelter as the "seller." The contract provides that the shelter will provide space and labor in selected locations in Mexico for the fabrication or assembly of the importer's products.

Costs incurred by the importer in manufacturing lock assemblies in Mexico include material/component expenses, assists (including tools, dies and molds), foreign operating expenses, profit and packing. The importer makes two types of payment to the shelter for the assembler's services and expenses. One type of payment is direct compensation for the assembly services, which is primarily based on billings for the labor-hour expenditures plus a mark-up to cover various labor-associated costs, and profit. The importer does not question that this direct compensation for the assembly services is part of the price actually paid or payable, as it constitutes direct payment to the seller for the merchandise. The second type of payment consists of "pass-through" payments, which are the importer's "reimbursement" to the shelter for expenses that the assembler incurs to third parties in Mexico. The assembler pays the Mexican entities and the shelter bills the importer for the actual costs. The importer has categorized the third party pass- through expenses as follows: rent, salaried and indirect personnel, fringe benefits, leasehold improvements, equipment purchases, insurance, Mexican brokerage, professional services, protective services, etc. The importer is contemplating paying these third party pass- through expenses directly to the third parties, either by opening an account in a Mexican bank in the name of a designated agent of the importer, which is incorporated in Mexico, or by paying the third parties directly.

ISSUES:

1. Whether transaction value is the proper basis of appraisement for these transactions.

2. Assuming transaction value is the proper basis of appraisement, whether pass- through payments made by the importer to the shelter are part of transaction value.

3. Assuming transaction value is the proper basis of appraisement, whether payments made by the importer to a third party who provides a service to a party related to the seller is part of the price actually paid or payable, or whether such payment is to be added to the price actually paid or payable for the imported merchandise as an assist.

LAW AND ANALYSIS:

1. Basis of appraisement

Transaction value is the preferred basis of appraisement, and is defined in section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b); TAA) as the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus five enumerated statutory additions. The transaction between the importer and the shelter represents a sale for exportation to the United States as those words are used in 402(b) of the TAA, and may, therefore be the basis for transaction value.

In cases where the shelter is the importer of record and the assembler and the shelter are related, even where 19 CFR 152.103(a)(3) is applicable, the transaction value must be acceptable under section 402(b)(2)(B) of the TAA and 19 CFR 152.103(j)(2)(i). T.D. 90-42. The transfer price between related parties in a shelter transaction will be examined closely in accordance with Customs Notice on Transfer pricing, as published in the January 27, 1993 Customs Bulletin.

2. Dutiability of pass-through payments

The term "price actually paid or payable" is defined in 402(b)(4) of the TAA as the "total payment (whether direct or indirect...) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller." The payments made to the shelter for direct compensation for the assembly services provided by the assembler are part of the price actually paid or payable. However, with respect to the pass- through payments, the importer contends that although they are "payments made to the seller," they are for expenses which are unrelated to the merchandise and thus not included in the price actually paid or payable for the merchandise.

It is the position of the Customs Service that all monies paid to the seller, or a party related to the seller, are part of the price actually paid or payable for the merchandise under transaction value. See e.g. Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990); Headquarters Ruling Letter (HRL) 544640 dated April 26, 1991. The Court in Generra, specifically held that "a permissible construction of the term 'for imported merchandise' does not restrict which components of the total payment may be included in transaction value." Generra, 905 F.2d at 380.

The importer's request lists numerous pass-through expenses. The importer assumes that the following pass-through expenses (list #1) would be part of the price actually paid or payable under transaction value because they relate to the imported merchandise:
production department expenses quality control department expenses
Mexican customs brokerage (Southbound) local freight and Mexican (Southbound) freight equipment purchases, equipment repair/maintenance tools, dies, molds, equipment (supplied by Mexican vendors) equipment rental

It is the importer's position that the following pass-through expenses (list #2) paid to the shelter bear no relationship to the imported merchandise and should not be part of the price actually paid or payable under transaction value:
employee benefits and fringes for personnel working in Mexico employee education
"salaried" personnel work permits insurance travel and entertainment automobile expenses meetings/seminars membership/dues contributions/donations protective services laundry and uniforms newspaper subscriptions personnel recruitment employee medical expenses project 88 (construction of new facilities) professional services rental expenses utilities/telephone expenses office equipment, maintenance, office supplies, data processing employee loans plant maintenance, plant facilitation, and maintenancesupplies U.S. payroll amortization of leasehold improvements

In your request, you cite TAA No.43 dated December 17, 1981, TAA No.45 dated January 26, 1982, TAA NO.52 dated September 21, 1982 and HRL 544353 dated October 24, 1989, in support of your position that although the pass-through payments are made to the seller, they are expenses unrelated to the merchandise, thus not included in the price actually paid or payable. We find the facts in TAA Nos. 43 and 45 significantly distinguishable from the instant case. Further, none of the rulings are applicable as they were decided prior to Generra. According to the Court's decision in Generra, as long as a "payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods." 905 F.2d at 380. The Court further found that although $0.95 per unit of the total payment made to the seller by the importer was for quota charges incurred by the seller to a third party, "it was reasonable for Customs to conclude that the entire payment was 'for imported merchandise' within the meaning of subsection 1401a(b)(4)(A). Thus, to the extent that the pass-through payments are paid to the shelter, or a party related to the shelter, even though the payments may represent something other than the per se value of the assembled merchandise, all the payments to the shelter can reasonably be concluded to be for imported merchandise and are part of the price actually paid or payable.

3. Payments made directly to third parties

While the importer currently reimburses the shelter for the expenses in lists #1 and #2 for payments made to third parties, it is contemplating paying the expenses directly to the third parties, without paying them through the shelter. The importer seeks a determination of whether the payments made to the third parties would be part of the price actually paid or payable, or whether the payments can be categorized as assists.

As previously stated, the term "price actually paid or payable" is defined as "the total payment (whether direct or indirect,...) made, or to be made, for imported merchandise, by the buyer to, or for the benefit of, the seller." (Emphasis added). Customs has consistently ruled that payments made by a buyer to a third party for services to benefit the seller may constitute an indirect payment to the seller includable in transaction value, and payments by a buyer for services not performed for the benefit of the seller do not form part of transaction value. See e.g. TAA No.60 dated march 9, 1983. In TAA No.60, payments to a third party were made for services provided to the assembler consisting of conferring with U.S. importers, setting up assembly programs, checking markets in the U.S., looking for used machinery and attending trade shows. Customs ruled that the services provided were for the benefit of the assembler which would ordinarily be performed by the assembler and payment for these services was an indirect payment to the assembler and as such was part of the price actually paid or payable for the merchandise.

You cite several rulings to support the importer~s contention that the items in lists #1 and #2 are not part of the price actually paid or payable if they are paid for by the importer directly to the third party. In the rulings cited by you, we did not find that the services provided by the third party, for which payments were made directly to the third party, were for the benefit of the seller. The services in the cases cited were for product testing (HRL 542946 dated January 27, 1983), inspection of quality of merchandise prior to importation (HRL 543837 dated February 18, 1987), locating sources of quota (HRL 544143 dated July 5, 1988), a quasi governmental agencys' advice on the sourcing of goods from the People's Republic of China (HRL 544264 dated February 24, 1989), management and negotiating services for terminating an agreement between the importer and supplier (HRL 544276 dated October 24, 1989), the purchase of quota (HRL 544472 dated July 30, 1990) and foreign warehousing costs (HRL 543569 dated July 16, 1985 and HRL 544758 dated February 21, 1992). We do not find any of the above cases dispositive of the issue presented in this case. The services described in lists #1 and #2 do not include any of the services described in the cases cited by the importer, and we find the services described in lists #1 and #2 to be performed for the benefit of the assembler, which would ordinarily be provided by the assembler.

In HRL 542984 dated April 8, 1983, we ruled that payments for product liability insurance made by the buyer to a third party insurer were part of the price actually paid or payable for the imported merchandise as indirect payments, where a condition of the sale required the seller to obtain suitable insurance and bear the cost thereof. Title II of the Statement of Administrative Action of the TAA provides that one example of an indirect payment to a seller would be "the settlement by the buyer, whether in whole or in part, of a debt owed by the seller." We have stated that payments made to a seller or a party related to a seller are part of the price actually paid or payable. See TAA No.6. In this regard where the payments are for the settlement of a debt of a party related to the seller, such payments are also part of the price actually paid or payable for the imported merchandise. Thus, a payment made directly to the third party supplier by the importer for an expense incurred by the assembler is the settlement by the importer of a debt owed by the assembler, and is included in the price actually paid or payable for the imported merchandise.

Likewise a payment made directly to a third party supplier for services provided by the third party, which services are for the benefit of the assembler, are part of the price actually paid or payable for the imported merchandise. Such payment is for the benefit of a party related to the shelter, and is thus included in the price actually paid or payable for the imported merchandise. It is not material whether the importer pays the third party from a Mexican bank through an agent incorporated in Mexico, or pays the third party directly. As we find that the pass-through payments are included in the price actually paid or payable for the imported merchandise, we do not reach the issue of whether they are assists.

HOLDING:

1. Transaction value is the proper method of appraisement for these transactions.

2. Pass-through payments made to the assembler or the shelter by the importer are part of the price actually paid or payable for the imported merchandise.

3. Payments made by the importer to a third party who provides the services in lists #1 and #2 to the assembler related to the shelter, are for the benefit of the assembler, and payments for expenses incurred by the assembler are indirect payments to the assembler and are included in the price actually paid or payable for the imported merchandise.

Sincerely,

John Durant, Director
Commercial Rulings Division

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